Shareholder to bank leaders: It\’s hard to trust you

Shareholder activist John Harrington has a message for the boards of Goldman, J.P. Morgan and AIG: I don’t trust you.

Harrington Investments

John Harrington

Harrington, president of Harrington Investments in Napa, Calif., filed proposals asking Goldman Sachs
, J.P. Morgan
and AIG
for more information on how the company leaders are legally and ethically obligated to shareholders.

Getty Images

The proposals ask each company to prepare a report examining \”opportunities for clarifying and enhancing implementation of directors’ and officers’ fiduciary, moral and legal obligations to shareholders and other stakeholders.”

For example, the proposals say, the companies should spell out “the extent to which directors and officers are required to provide balanced, truthful accounts” of matters that concern shareholders. The companies could also clarify the directors’ and managers\’ “relationship between loyalty to the company and to society\” and their duty to \”take action when having sufficient notice of potential impacts of corporate activities on society.\”

Representatives for Goldman Sachs, J.P. Morgan and AIG declined to comment. Harrington said that Goldman Sachs had already asked the Securities and Exchange Commission for permission to ignore the proposal, saying it has already substantially implemented the suggestions.

A board of directors is supposed to oversee a public company on behalf of shareholders, hiring and firing top executives, including the CEO. Directors have been blamed for being lax in their oversight in the run-up to the financial crisis, allowing the banks to take on too much risk. Banks have taken steps to reassure shareholders that they are acting ethically and responsibly.

Harrington argues, though, that a company\’s policy statements aren\’t enough to convince him that the board is fighting for shareholders. He complained that board members tend to make decisions based on information from the company, rather than independent sources, and that they tend to communicate with shareholders only through the company.

\”Never have I seen directors go to independent, outside sources to justify or verify what the company tells them,\” said Harrington, whose firm has $180 million in assets under management. \”If you just go to a meeting and listen to management and boom, you rubber stamp it, how can you exercise your fiduciary duty?\”

Bloomberg

Harrington, 68, is a familiar presence in the shareholder activism scene, attending annual meetings for some four decades . Last year he placed a proposal at Bank of America
asking that shareholders be allowed to nominate candidates to the board of directors. He also placed a proposal at Citigroup
saying the bank should be stingier when agreeing to give its board members protection from lawsuits.

The proposal at Bank of America got 9% support last year. The Citigroup proposal got 3%.

Harrington said he has filed the proposals again and hopes they will be on the ballot at the 2014 shareholder meetings. He guessed that the low support last year might be because he doesn’t usually work alongside Institutional Shareholder Services, which advises big investors on how to vote their shares.

The big banks hold their shareholder meetings in the spring, and they\’re one of the rare instances when ordinary investors can see a company’s CEO and board members face-to-face and ask questions. Before the meeting, shareholders can file proposals about things they\’d like to change at the company, provided they meet some federal standards on owning a certain number of shares and for a certain amount of time.

Filing a proposal doesn\’t mean it will get on the ballot. Companies can ask the SEC for permission to ignore a proposal for any number of reasons, arguing, for instance, that it is too vague or interferes with ordinary business.

Companies can also keep a proposal off the ballot by working with shareholders before the annual meeting, making concessions to persuade them to withdraw.

Most of Goldman\’s directors earned at least $500,000 in cash and restricted stock for being on the board for all of 2012, according to regulatory filings. J.P. Morgan paid its directors at least $245,000. AIG paid its directors at least $205,000.

“They have a playbook,” Harrington said. “They call you and ask you to withdraw the resolution, usually by agreeing to talk to you. They call that dialogue. … Usually they just reiterate their policies.”

– Christina Rexrode

Christina Rexrode covers banking for MarketWatch in New York. Follow her on Twitter @chris_rexrode. Follow The Tell on Twitter @thetellblog.

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